Over its 200-year history, the federal False Claims Act (“FCA”) has saved the federal government billions of dollars in false claims for payment. But one type of false claim remains off limits in federal courts. A provision of the federal FCA known as the “tax bar” prohibits suits based on failure to pay federal taxes. See 31 U.S.C. § 3729(d). Whistleblowers who uncover federal tax fraud are limited to the Internal Revenue Service’s whistleblower program.
Chicago lawyer Stephen Diamond has made quite a name for himself in recent years for his perceived abuse of the Illinois False Claims Act (“FCA”). Many believe Diamond is misusing the FCA or is using it for self-serving reasons not consistent with the FCA’s intent.
The IRS Whistleblower Award Program has paid over $230 million in awards over the last three fiscal years, according to its most recent report to Congress. The awards averaged over $650,000 each, and average about 18% of the amount collected in each case. The program received over 14,000 new claims during FY 2014. According to the report, the award program exists to provide whistleblowers with an incentive to report “significant tax noncompliance” to the IRS.
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According to the IRS Oversight Board’s recent report to Congress, the IRS paid $53 million last year to 122 whistleblowers. This is an average of nearly $435,000 per whistleblower. The whistleblower awards last year average 14.6 percent of the amounts collected by the IRS. As noted in the report, the law requires the IRS to pay awards if the information provided “substantially contributes to the collection of tax, penalties, interest, and other amounts when the amounts in dispute are more than $2,000,000.” The award ranges are based on “percentages of the collected proceeds.” The law is designed to encourage people “with knowledge of significant tax noncompliance to provide that information to the IRS.” According to the report, the IRS “continues to receive submissions from whistleblowers, many of whom claim to have inside knowledge of the transactions they are reporting. They often provide extensive documentation to support their claims.”
John Sinatra is a partner in the Business Litigation Practice at Hodgson Russ LLP. You can reach him at jsinatra@hodgsonruss.com.
New York Attorney General Eric Schneiderman announced on March 14, 2014, the successful conclusion of a tax whistleblower case brought under the historic 2010 amendments to the State False Claims Act. Those amendments authorized whistleblowers to earn huge rewards by bringing cases on behalf of the state against those who have engaged in significant violations of the tax law. We have written previously about the 2010 amendments and other New York tax whistleblower developments including the attorney general’s major whistleblower suit against Sprint/Nextel.
In this newly announced case, the attorney general’s press release disclosed that a “tax services provider” became aware of the tax violations and blew the whistle on a medical imaging company, Lantheus Medical Imaging, and its parent company, Bristol-Myers Squibb, for failing to pay more than $2.2 million in New York State franchise taxes, New York City corporation taxes, and MTA surcharges for the period 2002 to 2006.
Because the False Claims Act empowers the state to recover treble damages, the suit was settled with the payment of $6.2 million (which appears to be only a minor compromise by the state), of which $1,137,814 was earmarked for the whistleblower.
The settlement is good news for tax whistleblowers.
The New York False Claims Act (NY FCA) was amended in August 2010 to expressly apply to knowing violations of the New York State Tax Law. As reported in a previous blog entry, a whistleblower filed an action against Sprint Nextel Corporation alleging that it failed to collect or pay New York State sales taxes on receipts from the sale of certain wireless telephone services. After an investigation, the attorney general for the State of New York, Eric T. Schneiderman, intervened and filed a superseding complaint adopting the FCA claims and alleging additional claims against the mobile telecommunications service provider. Among those claims were claims premised on conduct predating 2010, when the NY FCA was amended to include tax violations.
After years of complaints from whistleblowers and other interested parties, the IRS whistleblower program—which was enhanced in 2006—has finally begun to show some signs of success. Consider:
- As my colleague John Sinatra reported, the IRS recently awarded a whopping $104 million to imprisoned UBS whistleblower Bradley Birkenfeld, the first award under the 2006 program
- Just last month, the IRS awarded $38 million to another whistleblower
Can it be, as Forbes recently reported, that “the days ahead look bright for whistleblowers and the IRS whistleblower program”? With a backlog of significant whistleblower cases filed after 2006 slowly churning through the IRS process, it is a safe bet that more cases are edging closer to completion and that the slow trickle of announcements from whistleblower attorneys about awards will begin to pick up. As more awards are announced, more whistleblowers will come forward.
According to numerous media reports citing his attorneys, former UBS Banker Bradley Birkenfeld has received a $104 million tax whistleblower reward for his role in exposing alleged secret Swiss banking schemes designed to enable U.S. taxpayers to evade taxes. The whistleblower’s revelations led to a $780 million settlement from UBS as well as tens of thousands of taxpayer coming forward in exchange for amnesty. The IRS’s tax whistleblower program provides a bounty or reward of up to 30 percent of the government’s recovery. Experts on both sides of these cases believe that the size of the reward will ensure that future tax whistleblowers are encouraged and incentivized to come forward with details of other tax schemes.
On April 19, 2012, Attorney General Eric T. Schneiderman filed a groundbreaking lawsuit against Sprint-Nextel Corporation for deliberately under-collecting and underpaying millions of dollars in New York State and local sales taxes. The lawsuit was brought under the New York False Claims Act, which, unlike its federal counterpart, expressly permits cases involving tax fraud.
There is an obvious tension between the desire to encourage employees to come forward with information necessary to report and expose fraud and the recognition that certain company information is truly private and confidential and should remain so. A recent decision from the U.S. Department of Labor Administrative Review Board further complicates the issue.
Celanese Corporation, an international publicly traded corporation, hired Matthew Vannoy to catalog and reconcile employee expense reimbursement submissions. In 2007, Vannoy filed an internal compliant about employees misusing company credit cards; around the same time, he began talking to an attorney about Celanese’s business practices with respect to its employee credit card-use program. Vannoy then filed a claim with the IRS Whistleblower Rewards Program, and he provided documents to the IRS that included Celanese proprietary and confidential information. A few months later, Vannoy’s supervisor began conducting an investigation into his email communications with employee cardholders and found that he sent a document containing 1,600 social security numbers of Celanese employees to a personal e-mail account. Vannoy was suspended without pay and ultimately terminated.
As we move into the final stretch of 2011, interesting developments appear to be on the horizon for tax whistleblowers in New York.
Now in his nine month as attorney general, New York’s Eric Schneiderman is showing no sign of slowing down in his pursuit of whistleblower cases alleging tax fraud. Similarly, on the federal side, all indications are that the IRS will finally begin paying awards to some of the hundreds of whistleblowers who have filed complaints of significant tax noncompliance by thousands of taxpayers since the program was strengthened in 2006 with the enactment of section 7623(b) of the Internal Revenue Code. Given these developments, it looks like we are on the precipice of some exciting times for tax whistleblowers and those who believe in tax compliance and fairness.
Make no mistake about it: paying big awards to whistleblowers who disclose illegal conduct, including tax offenses, has become a top government enforcement strategy. Why? Because rewarding whistleblowers works. State and federal False Claims Act cases, which permit whistleblowers to sue wrongdoers on behalf of the government as qui tam plaintiffs, have skyrocketed and have helped the government recover tens of billions of taxpayer dollars, a sizeable piece of which often goes to whistleblowers.
Since the IRS beefed up its tax whistleblower program in 2006 by increasing and making mandatory whistleblower awards for claims involving IRS tax obligations of $2 million or more, federal whistleblower claims have increased sharply in both number and quality. And whistleblowers are recovering millions for their efforts. In April 2010, for example, as reported in the Wall Street Journal and Accounting Today, an in-house CPA at a Fortune 500 financial firm earned $4.5 million for exposing a $20 million tax liability owed by his firm.
Tax whistleblowers and those considering becoming whistleblowers recently got some good news regarding both the IRS whistleblower program and New York’s tax whistleblower False Claims Act.
On the federal front, news broke late last week that the IRS’s enhanced whistleblower program has finally produced a whistleblower award: $4.5 million paid to an accountant who blew the whistle on a former employer. According to published reports in the Wall Street Journal and elsewhere, the accountant came forward in 2007 after his employer ignored his repeated complaints that the employer was failing to pay federal taxes. Based on the whistleblower’s complaint, the IRS ultimately recovered approximately $20 million in back taxes and interest from the unidentified company, described in some articles as a large financial firm and a Fortune 500 company, and paid the whistleblower 22 percent of the amount recovered.
As reported in my last blog post, tax whistleblowers and those considering becoming whistleblowers recently got some good news regarding both the IRS whistleblower program and New York’s tax whistleblower False Claims Act.
On the state side, potential whistleblowers should be encouraged by the swift-moving developments in the New York attorney general’s office.
Under Internal Revenue Code Section 7623(a), the IRS shall pay awards to people who provide “specific and credible information” to the IRS if the information results in the collection of taxes, penalties, interest, or other amounts from a noncompliant taxpayer. Guaranteed awards, however, are limited to individuals who provide information about significant tax issues. “Significant” is defined by the IRS as taxes, penalties, and interest owed in excess of $2 million. Thus, to meet the $2 million threshold—including back taxes, interest and penalties—the noncompliant taxpayer should have an annual gross income of more than $200,000. If the IRS successfully obtains a recovery from such a taxpayer, the IRS is required to pay the whistleblower between 15 and 30 percent of the recovery. If the whistleblower is not satisfied with the reward, he or she may appeal to the U.S. Tax Court. In cases involving less than $2 million, payment of an award to the whistleblower is discretionary, with a maximum of 15 percent of the recovery and no right of appeal.
And he’s off!
In the short time since he assumed office on January 1, 2011, New York Attorney General Eric Schneiderman has made unmistakably clear his commitment to combating fraud against the state.
▪ In announcing the settlement of an $18 million Medicaid whistleblower case on January 18, 2011, he proclaimed that “cracking down on those who try to defraud the taxpayers” will be one of his “top priorities.”
On August 13, 2010, New York State Governor Paterson signed into law Assembly Bill 11568, which includes major changes to New York’s False Claims Act, enacted in 2007. According to legislators, the bill was passed to address several issues that have arisen in the courts since its enactment. It is also designed to assure that the New York law continues to keep pace with federal law. One of the biggest changes, a divergence from the federal False Claims Act, is a provision that allows qui tam plaintiffs to bring actions for tax fraud, but only when the net income or sales of the defendant total $1 million or more and the damages pleaded in the action exceed $350,000. It also strengthens the protections for whistleblowers, both private individuals and government employees, who uncover information concerning the misuse of government funds. These amendments took effect immediately and apply to all false claims, records, and statements made or used prior to, on, or after the April 1, 2007, effective date of the New York False Claims Act.